<PAGE>
FIRST DATA CORPORATION
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1998
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------- ----------
Commission file number 1-11073
-------
FIRST DATA CORPORATION
----------------------
(Exact name of registrant as specified in its charter)
DELAWARE 47-0731996
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5660 NEW NORTHSIDE DRIVE, SUITE 1400, ATLANTA, GA 30328-5800
-------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (770) 857-0001
--------------
NOT APPLICABLE
--------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
---- ----
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Title of each class
------------------- Number of Shares Outstanding
Common Stock, $.01 par value as of November 2, 1998
----------------------
442,643,300
<PAGE>
FIRST DATA CORPORATION
INDEX
-----
PAGE
PART I FINANCIAL INFORMATION NUMBER
------
Item 1. Consolidated Financial Statements:
Consolidated Statements of Income for the
three and nine months ended September 30, 1998 and 1997... 3
Consolidated Balance Sheets at September 30, 1998
and December 31, 1997..................................... 4
Consolidated Statements of Cash Flows for the
nine months ended September 30, 1998 and 1997............. 5
Notes to Consolidated Financial Statements................ 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............. 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
PART II OTHER INFORMATION
Item 1. Legal Proceedings......................................... 22
Item 5. Other Information......................................... 22
Item 6. Exhibits and Reports on Form 8-K.......................... 23
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FIRST DATA CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- ------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Service revenues $1,253.2 $1,231.3 $3,677.1 $3,698.9
Product sales and other 26.3 62.0 85.8 155.9
-------- -------- -------- --------
1,279.5 1,293.3 3,762.9 3,854.8
-------- -------- -------- --------
EXPENSES
Operating 796.8 775.1 2,409.9 2,441.9
Selling, general & administrative 181.3 185.3 555.0 563.3
Provision for loss on contract -- -- 125.2 --
Restructuring, business divestitures
and impairment, net -- -- 38.9 211.6
Interest 25.5 29.7 80.3 85.3
-------- -------- -------- --------
1,003.6 990.1 3,209.3 3,302.1
-------- -------- -------- --------
Income before income taxes 275.9 303.2 553.6 552.7
Income taxes 88.7 109.2 190.3 250.9
-------- -------- -------- --------
Net income $ 187.2 $ 194.0 $ 363.3 $ 301.8
======== ======== ======== ========
Earnings per common share-basic $ 0.42 $ 0.44 $ 0.81 $ 0.68
======== ======== ======== ========
Earnings per common share-diluted $ 0.42 $ 0.42 $ 0.81 $ 0.66
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
FIRST DATA CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
(Unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 510.9 $ 410.5
Settlement assets 8,131.8 8,364.7
Accounts receivable, net of allowance for doubtful accounts
of $31.0 (1998) and $29.1 (1997) 866.5 984.2
Property and equipment, net 834.0 774.9
Goodwill, less accumulated amortization
of $517.8 (1998) and $470.1 (1997) 3,020.3 3,101.6
Other intangibles, less accumulated amortization
of $525.5 (1998) and $420.7 (1997) 1,143.7 1,100.5
Other assets 698.2 578.8
---------- ---------
$ 15,205.4 $15,315.2
========== =========
LIABILITIES
Settlement obligations $ 7,964.7 $ 8,249.8
Accounts payable and other liabilities 1,707.8 1,657.4
Borrowings 1,602.3 1,750.7
---------- ---------
Total Liabilities 11,274.8 11,657.9
---------- ---------
STOCKHOLDERS' EQUITY
Common Stock, $.01 par value; authorized 600.0 shares,
issued 448.9 shares in 1998 and 1997 4.5 4.5
Additional paid-in capital 2,144.2 2,132.9
---------- ---------
Paid-in capital 2,148.7 2,137.4
Retained earnings 1,816.5 1,509.9
Accumulated other comprehensive income 97.0 65.8
Less treasury stock at cost, 4.8 shares (1998) and 2.0 shares
(1997) (131.6) (55.8)
---------- ----------
Total Stockholders' Equity 3,930.6 3,657.3
---------- ---------
$ 15,205.4 $15,315.2
========== =========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
FIRST DATA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1998 1997
---- ----
<S> <C> <C>
Cash and cash equivalents at beginning of period $ 410.5 $ 271.7
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income 363.3 301.8
Adjustments to reconcile to net cash provided by operating activities:
Depreciation and amortization 433.6 389.5
Provision for loss on contract 125.2 --
Noncash portion of restructuring, business
divestitures and impairment, net 28.7 180.2
Other noncash items 23.0 (4.6)
Increase (decrease) in cash, excluding the effects of acquisitions
and dispositions, resulting from changes in:
Accounts receivable (38.4) (30.2)
Other assets (41.0) (32.5)
Accounts payable and other liabilities 11.6 31.8
Income tax accounts 15.4 106.3
------- -------
Net cash provided by operating activities 921.4 942.3
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Current year acquisitions, net of cash acquired (97.2) (318.5)
Payments related to other businesses previously acquired (53.9) (57.8)
Proceeds from dispositions, net of expenses paid 150.0 262.9
Additions to property and equipment, net (272.6) (210.7)
Payments to secure customer service contracts, including outlays
for conversion, and capitalized systems development costs (256.5) (208.7)
Other investing activities (7.3) (67.3)
------- -------
Net cash used in investing activities (537.5) (600.1)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Short-term borrowings, net 4.5 319.0
Issuance of long-term debt -- 124.6
Principal payments on long-term debt (153.6) (26.5)
Proceeds from issuance of common stock 72.7 136.4
Purchase of treasury shares (179.7) (723.9)
Cash dividends (26.8) (26.8)
Other financing activities (0.6) 2.9
------- -------
Net cash used for financing activities (283.5) (194.3)
------- -------
Change in cash and cash equivalents 100.4 147.9
------- -------
Cash and cash equivalents at end of period $ 510.9 $ 419.6
======= =======
</TABLE>
See notes to consolidated financial statements
5
<PAGE>
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying consolidated financial statements of First Data Corporation
("FDC" or the "Company") should be read in conjunction with the Company's
consolidated financial statements for the year ended December 31, 1997.
Significant accounting policies disclosed therein have not changed.
Effective with the quarter ended December 31, 1997, the Company changed its
revenue presentation to report "Service revenues" and "Product sales and
other" versus "Operating revenues" and "Other income." Product sales and
other includes certain items formerly reported in operating revenues as well
as other income. The Company adopted this presentation in order to separate
recurring transaction and related service processing revenues, including
investment income and equity earnings, from all other revenues. Product sales
and other includes sales of the Company's products (which are generally
ancillary to service revenues), and other items which recur but which
fluctuate as to amount and timing.
The accompanying consolidated financial statements are unaudited; however, in
the opinion of management, they include all normal recurring adjustments
necessary for a fair presentation of the consolidated financial position of
the Company at September 30, 1998 and the consolidated results of its
operations for the three and nine months ended September 30, 1998 and 1997
and cash flows for the nine months ended September 30, 1998 and 1997. Results
of operations reported for interim periods are not necessarily indicative of
results for the entire year.
FDC's provides a variety of information services primarily to financial
institutions and commercial establishments. The largest category of services
involves information processing and funds transfer related to payment
transactions, including credit and debit cards, checks and other types of
payment instruments (such as money transfers, money orders, and official
checks). These services include the authorization, processing and settlement
of credit and debit card transactions, verification or guarantee of check
transactions, and worldwide nonbank money transfers.
FDC recognizes revenues from its information processing services as such
services are performed, recording revenues net of certain costs not
controlled by the Company (primarily interchange fees and assessments charged
by credit card associations of $415.8 million and $361.3 million for the
three months ended September 30, 1998 and 1997, respectively, and $1,134.0
million and $1,142.7 million for the nine months ended September 30, 1998 and
1997, respectively). Although these costs increased for the third quarter
(due primarily to increase in the volume of transactions processed), the
amounts for the first nine months of 1998 are less than 1997 due primarily to
the first quarter 1997 contribution of merchant contracts to alliances which
are accounted for under the equity method of accounting by the Company.
2. During the second quarter of 1998, the Company amended its agreement with
HSBC Holdings plc ("HSBC") which revised the scope of services to be provided
to HSBC. As a result of this amendment and because of difficulties in the
conversion process in Hong Kong which resulted in delays to the conversion
date and, consequently, significant unanticipated costs, the Company
determined that total estimated costs under the amended contract exceeded
anticipated revenues. Accordingly, a provision of $125.2 million was recorded
in the second quarter for such estimated net losses (reported on the
"Provision for loss on contract" line in the Consolidated Statements of
Income). Also, the Company determined that approximately $38.5 million of
platform development costs related to the HSBC project and other potential
non-US clients may not be recoverable in the near to medium term, and thus
were written off (reported on the "Restructuring, business divestitures and
impairment, net" line in the Consolidated Statement of Income). These two
charges totaled
6
<PAGE>
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
$120.8 million after-tax or $0.27 per share. In September 1998, the Company
announced the termination of its Hong Kong card processing contract with
HSBC. Management is currently evaluating its alternatives with respect to the
Company's Hong Kong based operations, but does not anticipate significant
adjustment of the previously recorded provision.
Also reported on the "Restructuring, business divestitures and impairment,
net" line in the Consolidated Statements of Income is a 1998 first quarter
$28.5 million pretax gain on the sale of the NTS transportation services
unit. This gain was offset by $28.9 million in restructuring charges
consisting principally of severance, facility closure and other activity exit
costs primarily related to the first quarter restructuring of the Company's
domestic merchant processing business unit.
In June 1998 the Company completed the sale of First Image Management Company
("First Image"), its imaging and document management business, for $150.0
million in cash. In January 1998, the Company announced its intention to sell
First Image, and recorded a 1997 pretax impairment charge of $106.7 million,
reflecting the anticipated loss on the disposition. The finalization of the
transaction resulted in no significant adjustment to the previously recorded
loss.
During the first nine months of 1997, the Company completed dispositions of
three business units, incurred a related impairment charge and incurred
restructuring charges (consisting principally of employee severance, facility
closures and other exit costs) involving several business areas. These
activities, which are reported on the "Restructuring, business divestitures
and impairment, net" line in the Consolidated Statements of Income, reduced
net income by $187.3 million, or $0.40 per share.
At September 30, 1998, total remaining accrued liabilities for the 1998 and
1997 restructuring charges were $13.6 million and $5.8 million, respectively.
3. During the first nine months of 1998 the Company acquired all or a portion of
several businesses. In conjunction with the sale of NTS, FDC simultaneously
purchased (from the Company that acquired NTS) a gaming services business
(now called First Data Financial Services, or "FDFS") for $50.5 million (net
of cash acquired) plus the fair market value of the NTS net assets of $65.0
million. FDFS provides credit card, debit card and money transfer services to
gaming establishments and their customers. The assets of FDFS were
contributed to a joint venture in July, 1998, and accordingly, first and
second quarter 1998 results have been restated to reflect FDFS under the
equity method of accounting. Prior to its contribution, FDFS was accounted
for as a consolidated subsidiary. In addition, eight other businesses or
additional ownership interests were acquired in 1998 for a total of $46.7
million in cash and approximately 183,000 shares of FDC common stock,
expanding the product and service offerings of the investment processing
services, card issuer services, and payment instruments business.
All current year acquisitions have been accounted for as purchases and their
results are included with the Company's results from the effective date of
each acquisition. No pro forma financial information with respect to the
above acquisitions is presented as the aggregate impact is not material.
4. The Company's commercial paper borrowings at September 30, 1998 were $620.9
million under its $1.5 billion commercial paper program and supporting
revolving credit facilities. Pursuant to a 1998 agreement between FDC and
VISA USA, $175.0 million of the supporting banking facilities has been
designated to be used solely for the purpose of meeting the Company's VISA
related bankcard settlement obligations, if necessary. In addition, the
Company currently has $575 million of Medium-Term Notes outstanding bearing
an average interest rate of 6.48%.
7
<PAGE>
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
At September 30, 1998, the Company still has $625 million available under
shelf registrations providing for the issuance of debt and equity securities
and $210.0 million available under its uncommitted bank lines.
5. Earnings per common share amounts are computed by dividing net income amounts
by weighted average common and common equivalent shares (when dilutive)
outstanding during the period. Amounts utilized in per share computations are
as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- --------------------------
1998 1997 1998 1997
---------------------------------------------------------------------------------------------------------------
(In millions)
<S> <C> <C> <C> <C>
Weighted average shares outstanding:
Basic weighted average shares 446.5 441.1 446.8 445.4
Stock options 2.4 6.2 3.3 5.8
Put options -- 0.1 --
Senior convertible debentures -- 20.4 -- 20.4
Restricted stock awards 0.1 -- 0.1 --
----- ----- ----- -----
449.0 467.8 450.2 471.6
===== ===== ===== =====
Earnings add back related to senior
convertible debentures -- $ 3.5 -- $10.5
</TABLE>
Diluted earnings per common share was calculated based on weighted-average
shares outstanding including the dilutive impact of common stock equivalents
which consist of outstanding stock options, warrants, restricted stock awards
and convertible debentures (1997). The after-tax interest expense and issue
cost amortization on the debentures is added back to net income when common
stock equivalents are included in computing earnings per common share.
6. The components of comprehensive income are as follows (in millions):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $187.2 $194.0 $363.3 $301.8
Foreign exchange effect (2.5) (5.4) (3.4) (5.5)
Unrealized gain on
securities 35.6 10.5 34.6 7.2
------ ------ ------ ------
Total comprehensive income $220.3 $199.1 $394.5 $303.5
====== ====== ====== ======
</TABLE>
8
<PAGE>
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
7. In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes
standards for the way that public business enterprises report information
about operating segments in annual financial statements and requires that
those enterprises report selected information about operating segments in
interim financial reports. It also establishes standards for related
disclosures about products and services, geographic areas and major
customers. SFAS 131 is effective for financial statements for fiscal years
beginning after December 15, 1997, and therefore, the Company will adopt its
requirements in connection with its annual reporting for the year ending
December 31, 1998.
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". The SOP is
effective for the Company beginning on January 1, 1999; however, earlier
adoption is permitted. The SOP will require the capitalization of certain
costs incurred after the date of adoption in connection with developing or
obtaining software for internal use. The Company currently expenses internal
development costs for internal use software as incurred. The Company is
evaluating the impact of the SOP on the Company's future earnings and
financial position, but does not expect it to be material.
In April 1998, the AICPA issued SOP 98-5, "Reporting the Costs of Start-up
Activities". The SOP is effective beginning on January 1, 1999, and requires
that start-up costs capitalized prior to January 1, 1999 be written-off and
any future start-up costs be expensed as incurred. The Company is evaluating
the impact of the SOP on the Company's future earnings and financial
position, but does not expect it to be material.
In June 1998, the Financial Accounting Standards Board issued statement of
Financial Accounting Standards No. 133 "Accounting for Derivative and Hedging
Activities" ("SFAS 133"). SFAS 133 requires companies to record derivatives
on the balance sheet as assets or liabilities at fair value. It is effective
for financial statements for fiscal years beginning after June 15, 1999. The
Company is evaluating the impact of SFAS 133 on the Company's future earnings
and financial position, but does not expect it to be material.
9
<PAGE>
FIRST DATA CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
- -------------
SIGNIFICANT DEVELOPMENTS
First Data Corporation ("FDC" or "the Company") continues the emphasis begun in
1997 on its three primary lines of service within the United States and around
the world: domestic and international card issuer and information services,
merchant processing services and payment instruments services. The Company has
continued this emphasis to further its overarching strategic objective: to help
make electronic payments the payment method of choice worldwide. FDC is keenly
focused on improving execution of strategic plans, identifying operational
efficiencies and building on the fundamental strengths of its business.
During 1998's third quarter, the Company announced the promotion of one of its
senior executives to the position of President and Chief Operating Officer, a
new position for the Company. In addition, the Company created the new position
of Chief Information Officer. The position of president and chief operating
officer provides more focused leadership and facilitates the meeting and
exceeding of operating and financial goals. The position of chief information
officer provides more focused leadership on critical systems issues and projects
throughout the Company.
In conjunction with the above actions, the Company initiated plans to merge
certain critical operations functions common to several business units-
specifically the Print/Mail/Plastics and Voice Center/Automatic Response Unit
areas. By combining such functions, the Company expects to lower expenses and
improve service quality by achieving greater production efficiencies and
improving processes.
Card issuer services continues to sign new clients; during the 1998 third
quarter, First Consumers National Bank, whose private label portfolio includes
Spiegel Catalog, Eddie Bauer and Newport News, was signed. This client is
scheduled for conversion in 1999. The Company also converted the Wells Fargo
bankcard portfolio during the third quarter. In addition, the information
management services area showed improved revenues over second quarter 1998
during 1998's third quarter as a result of increased sales activity.
In the merchant processing services area, electronic check acceptance, which was
introduced as a new point of sale payment method during 1998, is now in 5,000
locations. In addition, in July 1998 a new gaming services joint venture was
formed among FDC, BA Merchant Services, Inc. and USA Processing ("BMCF") into
which the Company contributed First Data Financial Services.
In the payment instrument services area, Western Union continues to experience
strong growth. Western Union now offers money transfer services at more than
50,000 agent locations, up 26 percent from last year, in 162 countries
worldwide.
In October 1998 the Company completed the sale of VIPS Healthcare Information
Solutions for $48.0 million cash, marking the completion of FDC's exit from the
health care administrative services and software business. This transaction will
result in a 1998 fourth quarter pretax gain of approximately $20 million. VIPS
accounted for less than 1% of FDC's revenues in 1997 and year to date 1998.
FDC remains the market leader in its three major business groups: card issuer
processing, merchant processing and payment instruments. The Company will
continue to focus on these core business areas throughout 1998 and will continue
to assess how best to serve its customer base. This continued focus and
assessment could result in the Company taking future actions to alter its
product and service offerings
10
<PAGE>
FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Continued)
as well as action to further streamline operations and reduce costs. These
actions could result in further charges against income, the timing and magnitude
of which are not presently determinable.
RESULTS OF OPERATIONS
Effective with the quarter ended December 31, 1997, the Company changed its
revenue presentation to report "Service revenues" and "Product sales and other"
versus "Operating revenues" and "Other income." Product sales and other
includes certain items formerly reported in operating revenues as well as other
income. The Company adopted this presentation in order to separate recurring
transaction and related service processing revenues, including investment income
and equity earnings, from all other revenues. Product sales and other includes
sales of the Company's products (which are generally ancillary to service
revenues) and other items which recur but which fluctuate as to amount and
timing.
Results of operations comparisons to the first nine months of 1997 are
significantly impacted by the divestitures completed in 1997 and 1998: GENEX in
February 1997, FIRST HEALTH Services and FIRST HEALTH Strategies in July 1997,
Nationwide Credit in December 1997 and First Image Management Company in June
1998. Also in December 1997, the Company signed an agreement whereby another
publicly traded insurance company began a process of renewing insurance policies
issued by EBP Life Insurance Company, Inc. ("EBP Life") on its own paper. This
transaction allowed EBP Life to substantively exit the insurance business.
Collectively, the four units divested in 1997 and EBP Life represented
approximately 6% of total 1997 revenues. First Image represented approximately
5% of 1997 revenues and 3% of year-to-date 1998 revenues.
The Company derives revenues in its primary service areas principally on the
number of accounts or transactions processed, a percentage of dollar volume
processed, or on a combination thereof. Lesser amounts of revenue are generated
from foreign currency exchange on money transfer transactions and sharing in
investment earnings on fiduciary funds. Total revenues for the quarter ended
September 30, 1998 decreased 1% to $1.28 billion from $1.29 billion in the prior
year quarter and for the nine months were down 2%, to $3.76 billion. Revenues
continued to be impacted by significant divestiture activity over the last year
as the Company has focused on its core payment services business. Revenue also
was affected by the contribution of First Data Financial Services ("FDFS") to a
gaming services joint venture in July 1998. First and second quarter 1998
revenues have been restated by a total of $54.0 million to reflect FDFS being
reported under the equity method of accounting. Prior to its contribution, FDFS
was accounted for as a consolidated subsidiary. Revenue growth of continuing
businesses was 9% for the quarter and year-to-date.
Domestic card issuer revenues increased by 6% for both the quarter and year-to-
date periods to $309.8 million and $887.6 million, respectively. Growth in
underlying volumes continued to be strong, and the third quarter of 1998 saw a
large increase in accounts on file. Total card accounts on file grew 24% (to
210.1 million) over third quarter 1997 with domestic card accounts growing to
184.6 million (23% growth). Revenues, however, grew more slowly than accounts on
file due to the large number of contract renewals at lower pricing during 1997,
a lower ratio of active accounts to total accounts on file, and exiting certain
unprofitable contracts in the back office servicing business. Revenues in the
domestic card issuer area will be below the prior year in the fourth quarter due
to difficult comparisons to strong prior year fourth quarter results in back-
office servicing and information management as well as somewhat lower growth in
core processing revenues. Consolidation among the financial institutions has led
to an increasingly concentrated client base, which results in a changing client
mix towards larger, highly sophisticated customers. The affects on pricing,
client mix, and product mix of providing services to this increasingly
concentrated industry will continue to cause revenues to grow more slowly than
accounts on file.
Revenues in the domestic merchant processing services area grew 2% to $330.7
million for the third quarter and 3% to $947.4 million year-to-date excluding
revenue from the gaming services venture now reported on the equity method of
accounting. Including revenues from the gaming services venture,
11
<PAGE>
FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Continued)
reported revenues would have increased 15% for the quarter and 13% for the year-
to-date. Domestic merchant card dollar volume grew 13% over the third quarter of
1997 to $62.4 billion and domestic merchant card transactions processed
increased 12.4% to 1.1 billion over 1997's third quarter. Adjusted for revenues
associated with merchant contracts sold in 1997 and the effect of changes in
revenue reporting due to the consolidation of two alliances in 1998 formerly
reported on the equity method, merchant card processing revenue growth was 6%
for the quarter. Third quarter growth exceeded second quarter growth of 5%,
despite slightly lower volume growth, reflecting some moderation in pricing
trends. Total merchant transactions processed were up 10% over the first nine
months of 1997 to 3.6 billion and dollar volume increased 16% to $175.8 billion.
TeleCheck's revenues grew 13% in the quarter and 14% year-to-date (excluding
from the comparison in the current and prior year gaming revenues now
contributed to the new gaming services joint venture).
Payment instruments services revenues grew 20% (on a tax equivalent basis) to
$430.8 million for the quarter and $1.1 billion year-to-date reflecting
continuing strong underlying volume increases. In particular, the Company
continues to experience strong growth in international and commercial money
transfer volumes. Aggregate money transfer transactions grew 27% (to 15.9
million) and 31% (to 45.0 million), respectively, over the third quarter and
first nine months of 1997. At September 30, 1998, the agent base had grown 26%
as compared to a year ago, with over 50,000 agents in 162 countries.
Product sales and other for the 1998 third quarter decreased 58% to $26.3
million from $62.0 million in the prior year quarter, continuing the trend noted
in the first half of 1998. This decline is due primarily to the prior year
quarter containing gains arising from the sales of certain merchant portfolios
of $15.0 million and fees associated with the termination of certain contracts.
In-store branch bank installations also declined from the prior year quarter.
Product sales and other declined 45% to $85.8 million year-to-date.
Operating expenses increased 3% to $796.8 million in the 1998 third quarter over
1997 and decreased 1% to $2,409.9 million. Year 2000 expenses for the 1998 third
quarter approximated $20 million and approximated $50 million year-to-date.
Expenses associated with several start-up businesses increased approximately $7
million over 1997's third quarter.
Selling, general and administrative expenses decreased 2% for the 1998 third
quarter and 1% for the nine months ended September 30, 1998 to $181.3 million
and $555.0 million, respectively, compared to $185.3 million and $563.3 million
for the same periods in the prior year. Increases in advertising expense at
Western Union and increased sales expenses at First Data Solutions resulted in a
4% increase in selling and marketing expenses for the quarter which were offset
by a 3% decrease in general and administrative expenses due primarily to cost
reduction initiatives implemented in the second quarter of 1998 at the
Information Management Group.
During the second quarter of 1998, the Company recorded a $125.2 million
provision related to estimated net losses associated with the HSBC contract
which was subsequently terminated. This amount is reported on the "Provision for
loss on contract" line in the Company's Consolidated Statements of Income.
Management is currently evaluating its alternatives with respect to the
Company's Hong Kong based operations, but does not anticipate significant
adjustment of the previously recorded provision.
12
<PAGE>
FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Continued)
During the first quarter of 1998, the Company sold its NTS subsidiary, resulting
in a pretax gain of $28.5 million. NTS represented less than 1% of FDC's total
revenues for 1997. The Company also recorded restructuring charges in the first
quarter totaling $28.9 million, principally relating to employee severance and
facility closure costs in the merchant processing services area. During the
second quarter of 1998, the Company wrote off $38.5 million of capitalized
platform development costs related primarily to the HSBC processing agreement
and other potential non-U.S. clients. In the first quarter of 1997, the Company
sold its GENEX subsidiary which resulted in a pretax gain of $50.5 million and
also recorded restructuring charges totaling $46.4 million. On July 1, 1997,
the Company completed the divestiture of its FIRST HEALTH Strategies and FIRST
HEALTH Services businesses and recorded a 1997 second quarter pretax loss of
$93.8 million. As a consequence of the Company's decision to divest these FIRST
HEALTH business units, the future value of the remaining health care
administration services businesses was diminished and the Company recorded
impairment charges related to such businesses of $118.4 million and other exit
related costs of $3.5 million. These items reduced 1997 nine month earnings by
$187.3 million ($0.40 per share). All of these 1998 and 1997 items are reported
on the "Restructuring, business divestitures and impairment, net" line in the
Company's Consolidated Statements of Income.
Interest expense for the 1998 third quarter decreased 14% to $25.5 million
compared to $29.7 million in the 1997 third quarter. On a year-to-date basis
interest expense decreased 6% to $80.3 million. The decrease in interest
expense is attributable to proceeds from divestitures and fewer acquisitions
which resulted in lower average debt balances.
FDC's effective income tax rate (excluding the impact of the provision for loss
on contract and restructuring, divestitures and impairment charges) of 32.1% and
32.5% for the third quarter and the nine months ended September 30, 1998
decreased from 36% in the same 1997 periods due primarily to increased tax-
exempt interest earnings on fiduciary funds in the investment portfolios (as a
result of growth in the businesses giving rise to the investment portfolios and
the conversion of American Express Travel Related Services payment products to
the Company's own payment products).
The Company reported net income of $187.2 million and $363.3 million for the
third quarter and nine months ended September 30, 1998, respectively. Excluding
the $15.0 million pretax gain on the sale of merchant processing portfolios in
the prior year quarter, net income rose 2% to $187.2 million in the quarter
ended September 30, 1998 compared to $184.4 million in the prior year quarter
and net income margins increased to 14.6% from 14.4% in the prior year period.
Net income for the nine months ended September 30, 1998 (before the 1998 loss on
contract provision and restructuring, divestitures, impairment charges in both
years and the 1997 gain on sale of merchant portfolios) was up 1% to $484.4
million compared to $479.5 million in the prior year period. Net income margins
(before the aforementioned charges) for the 1998 and 1997 nine month periods
were 12.9% and 12.5%, respectively.
The Company reported diluted earnings per common share of $0.42 and $0.81 per
share for the third quarter and nine months ended September 30, 1998,
respectively. Without the items referred to in the preceding paragraph, third
quarter earnings per share of $0.42 represented a 5% increase over $0.40 for
1997. On a year-to-date basis, earnings per share increased 4% from $1.04 to
$1.08.
13
<PAGE>
FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Continued)
CAPITAL RESOURCES AND LIQUIDITY
FDC continues to generate significant cash flow from operations, aggregating
$921.4 million in the nine months ended September 30, 1998, as compared to
$942.3 million for the nine months ended September 30, 1997. FDC utilized this
cash flow to reinvest in its existing businesses, to contribute to the financing
of business expansion, to fund treasury stock purchases, and to repay
borrowings.
FDC reinvests cash in its existing businesses principally to expand its
processing capabilities through property and equipment additions and to
establish customer processing relationships through contract payments and costs
for conversion and systems development. These cash outlays increased to $529.1
million in the 1998 nine months compared with $419.4 million in the 1997 nine
months. FDC expects total expenditures for systems and development and customer
conversions in 1998 to be somewhat higher than in 1997 due to growth in the
amount needed to support growing businesses and larger continuing businesses and
entries into new markets. This growth will be partially offset by the effect of
divestitures and lower per unit costs for data processing equipment. In
addition, the Company expects total Year 2000 related systems spending for the
full year 1998, which will be expensed as incurred, to be approximately $75
million, as compared to $32 million incurred for the full year 1997. (See the
Year 2000 section following Capital Resources and Liquidity for additional
information).
Overall, FDC's operating cash flow for the nine months ended September 30, 1998
exceeded its nonacquisition and disposition investing activities by $385.0
million. These cash sources contributed to funds utilized for acquisitions,
short-term borrowing repayments and treasury stock purchases.
The 1998 nine months cash outlays for acquisitions totaled $97.2 million, the
largest component of which was a $50.5 million payment to purchase FDFS, a
provider of credit card, debit card and money transfer services to gaming
establishments and their customers. The Company also paid $10.5 million
relating to businesses previously acquired and $43.4 million relating primarily
to certain of its alliance programs with bank clients in merchant processing.
The Company's financing activities include net borrowings, proceeds from stock
option exercises, share repurchases under the Board authorized program described
below and for purposes of meeting requirements of employee benefit programs, and
dividend payments. Net cash used in financing activities was $283.5 million
during the 1998 nine months, as compared to $194.3 million in the prior year
period. During 1997, the Company utilized funds from commercial paper
borrowings to support its investing activities, whereas in 1998 cash generated
from operations and proceeds from the First Image disposition funded such
activities and enabled the Company to reduce commercial paper outstanding.
The Company made cash outlays totaling $179.7 million in the nine months ended
September 30, 1998 to buy back shares of its common stock. Proceeds from stock
option exercises and related tax benefits totaling $72.7 million partially
offset these outlays. In addition, the Company continued its practice of paying
quarterly cash dividends, resulting in $26.8 million of cash payments to the
Company's common stockholders.
In September 1998, the Company announced that its Board of Directors authorized
management to purchase up to $500 million of its outstanding common stock.
Purchases are to be made in the open market or in privately negotiated
transactions and will depend on market conditions and other factors. The
Company expects funding for the program will come from operating cash flow and
existing bank facilities. As of November 2, 1998, the Company had repurchased
3.8 million shares under this program.
14
<PAGE>
FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Continued)
The Company has two outstanding shelf registration facilities, one providing for
the issuance of debt and equity securities up to $1.0 billion in the aggregate
(of which $625 million remains available) and the other providing for the
issuance of approximately 10 million shares of the Company's common stock in
connection with certain types of acquisitions.
Included in cash and cash equivalents on the Consolidated Balance Sheet at
September 30, 1998 is $88.5 million related to required investments of cash in
connection with the Company's merchant card settlement operation and additional
amounts used to support the operations of certain business areas; the remainder
is available for general corporate purposes. Also, FDC has available short-term
borrowing capability of $914.1 million at September 30, 1998 under the Company's
commercial paper program and through its bank credit lines.
The Company believes that its current level of cash and financing capability
along with future cash flows from operations are sufficient to meet the needs of
its existing businesses. However, the Company may from time to time seek
longer-term financing to support additional cash needs or reduce its short-term
borrowings.
YEAR 2000
The Company's business units provide information / transaction processing and
related services through computer systems running proprietary and third-party
software. While several units began Year 2000 (Y2K) readiness efforts prior to
1997, in June of 1997 the Company created a Year 2000 Task Force (the "Task
Force") to coordinate, monitor and assist the units in their Y2K efforts. The
Task Force developed a common planning process with specific planning phases and
timeline goals and monitors the progress of each unit toward those goals. The
Task Force regularly reports to executive management and the Board of Directors.
In addition, in August 1997, the Audit Committee of the Board of Directors
engaged the Gartner Group to provide independent analysis and assessment of the
Company's Y2K efforts.
SAFE HARBOR FOR YEAR 2000 FORWARD-LOOKING STATEMENTS. All forward-looking
statements regarding Y2K readiness, including estimates, forecasts and
expectations, are inherently uncertain as they are based on various expectations
and assumptions concerning future events and are subject to numerous risks and
uncertainties which could cause actual events or results to differ materially
from those projected. Important factors upon which the Company's Y2K forward-
looking statements are premised include: (a) retention of employees and
contractors working on Y2K projects; (b) customers' remediation of their
internal systems to be Y2K ready and their cooperation in timely testing; (c) no
material disruption of telecommunication, data transmission networks, payment
networks, government services, utilities or other infrastructure services and no
unexpected failure of third-party products; (d) no unexpected failures by third-
parties providing services to the Company; (e) no undiscovered sabotage of
systems or program code affecting the Company's systems; and (f) no undiscovered
material flaws in the Company's test processes. The Company undertakes no
obligation to update forward-looking statements.
15
<PAGE>
FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Continued)
STATE OF READINESS. The Company's Y2K preparedness efforts are
differentiated between information technology ("IT") systems and non-IT systems.
Non-IT systems are embedded systems that support facilities infrastructures,
such as microcontrollers in lighting, heating / ventilation / air conditioning,
security, elevator, fire, uninterrupted power supply, and other infrastructure
systems. All units are upgrading their facilities and have identified
facilities champions who are reviewing these non-IT systems that could affect
the work environment. Task Force guidelines are for each facility to have its
non-IT systems upgraded by December 31, 1998, although certain leased facilities
will continue to be upgraded through the first half of 1999.
IT systems include primarily computer hardware and software and related
systems. Described below are simplified explanations of the phases of the Y2K
readiness plan being implemented by the Task Force. Target dates for completion
of each phase as to all mission-critical systems are reflected in the chart
below.
Phase 1- Impact Analysis and Inventory. Define and survey Y2K issues.
Perform automated code surveys, work-process reviews, risk analysis,
business case development, etc., to determine approach and strategy.
Identify all required changes regarding applications, platforms,
connectivity, clients and vendors.
Phase 2- Code Renovation / Operating System Upgrade. Complete code
renovation and regression testing so systems can process both current and
future-dated data.
Phase 3- Data-Aged Test Execution. Test all changes made to various
components in a Y2K data-aged test environment, including appropriate
hardware, system software, and application software. At the completion of
Phase 3, the Company's systems will be Y2K ready subject to production
implementation in Phase 5.
Phase 4- Client Test Execution. Test with clients in the Y2K data-aged test
environment. Although there have been minimal changes to data interface
formats, this phase is to ensure that client systems can continue to
interface with the Company's systems in a Y2K environment. The Company's
computer services business focus and Y2K regulatory requirements applicable
to a large portion of the Company's client base result in extensive client
testing requirements. While Phase 4 is to be completed by June 30, 1999,
many business units anticipate continuing tests with clients past this
date.
Phase 5- Production Implementation. Transition hardware, system /
operating software, application software and business processes into a
production / live environment. Phase 5 to be completed by June 30, 1999.
While management anticipates that most mission-critical software will be in
production by December 31, 1998, the June 30, 1999 date allows for changes
responsive to test results from Phases 3 and 4.
16
<PAGE>
FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Continued)
The following Status Chart identifies the status of each phase of the
Company's Y2K plan for the mission-critical systems of the following material
business units as of October 31, 1998. Mission-critical systems are those
directly serving clients or clients' customers, and having a material impact on
client service in a normative mode of operation if not working properly. Status
is indicated as the approximate percentage of work completed for each phase.
Various business units have planned completion dates for certain phases prior to
the specified target dates. Management believes that its Y2K effort is on
schedule and that its mission-critical systems will be Y2K ready in a timely
manner.
<TABLE>
<CAPTION>
Business Unit Phase 1 Phase 2 Phase 3 Phase 4 Phase 5
- -------------------------------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Target Date 12/31/98 3/31/99 6/30/99 6/30/99
Card Issuer Units
First Data Resources 100% 99% 50% 5% 99%
First Data Australia 100% 100% 95% 0% 100%
First Data Resources Limited 100% 95% 60% 0% 75%
First Data Oil Services 100% 100% 55% 50% 99%
First Data Solutions 100% 99% 45% 20% 60%
Hogan Information Services 100% 100% 75% 0% 85%
Merchant Acquiring Units
First Data Merchant Services 100% 95% 45% 0% 80%
BMCF Gaming JV 100% 100% 100% 20% 20%
TeleCheck 100% 50% 10% 0% 50%
Payment Instruments Units
Western Union 100% 99% 90% 50% 90%
Orlandi Valuta 100% 85% 0% 0% 0%
Integrated Payment Systems 100% 70% 10% 0% 50%
CashTax 100% 100% 25% 25% 90%
Specialty Services Units
Call Interactive 100% 80% 80% 80% 70%
First Data POS (MicroBilt) 100% 90% 0% 0% 90%
Investor Services Group 100% 99% 99% 0% 60%
Teleservices 100% 95% 75% 75% 90%
</TABLE>
Material Relationships. The Company's material third-party relationships
include: (i) providers of hardware/software products, (ii) service / network /
gateway providers, and (iii) clients. The Company's remediation plan addresses
third party readiness by requiring an inventory of client and vendor issues,
identifying required changes, and testing with material third parties. The
status of assessment and testing with respect to third-party risks is reflected
in the Status Chart. Coordination with third parties regarding Y2K issues will
continue to the Year 2000 and beyond and the Company is working with material
third parties to minimize service interruptions that could occur in connection
with the Year 2000. Notwithstanding these efforts, unexpected third-party
failures could occur and, despite testing procedures, erroneous or corrupted
data received from third parties could impact internal systems and cause
material service disruptions.
Third-party relationships currently believed to be most material to the
Company are described below. (i) Clients- The Company does not control clients'
remediation efforts or timely testing on the Company's systems. However, many
of the Company's material clients are financial institutions subject to
supervision and regulation by banking regulatory agencies or the Securities and
Exchange Commission. These regulated entities are subject to Y2K compliance
requirements and supervisory examinations
17
<PAGE>
FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Continued)
focusing on Y2K readiness. (ii) Telecommunications- The Company has contracts
for telecommunication services with AT&T, MCI and Sprint in the U.S. and is
reliant on regional bell operating companies and other local service providers.
Several of the Company's businesses are similarly reliant upon telecommunication
providers in foreign countries. Telecommunication services are critical to all
of the Company's businesses. Two of the three U.S. based long-distance carriers
used by the Company have provided contractual agreements that they will be Y2K
ready in a timely manner. (iii) Postal Service- The Company is one of the
largest first-class mailers using the U.S. Postal Service. Postal services are
critical to many of the Company's businesses. By law, no alternative for first-
class mail service is available. The Postal Service has provided assurances
that it will be Y2K ready in a timely manner. (iv) Electronic Money Transfer
Networks- Most of the Company's businesses require settlement of financial
transactions through various electronic networks, primarily the Federal Reserve
Board's Fedwire(R) Funds Transfer System ("FedWire"), the Automated Clearing
House ("ACH"), the Bank Automated Clearing Services in the U.K. and other
similar settlement networks. The Federal Reserve has provided assurances
regarding their readiness and has provided testing dates for both FedWire and
ACH transfers. (v) Association Networks and Similar Proprietary Third-Party
Networks- Several of the Company's business units provide services related to
credit and debit card transactions which occur over the VISA, MasterCard,
Discover, American Express and EuroPay networks, regional Automated Teller
Machine networks, and various other proprietary third-party networks in the
United States and abroad. VISA has published a testing schedule and the Company
is coordinating testing with VISA. MasterCard has provided a test schedule and
the Company is working with MasterCard to align testing efforts. (vi)
Utilities- All businesses are reliant upon utilities for electricity, gas,
water, and sewers. The Company's readiness plan requires business units to work
with utility providers to confirm Y2K readiness and to coordinate contingency
plans in case of unanticipated events. The Company's major data centers have
power generation systems to provide electrical backup for reasonable periods of
time based on accepted business practices for the relevant business unit. (vii)
Internal Revenue Service- CashTax processes EFTPS transactions for the IRS.
CashTax is subject to oversight by the IRS, the Treasury Department and the
Inspector General, each of which regularly reviews its systems and operations
and all of which have performed specific Y2K inspections. CashTax has tested
its systems with the IRS using future-dated test data. (viii) EDS- Electronic
Data Systems provides data center services for Western Union including
application development and maintenance. In addition, EDS provides debit
gateway services to First Data Resources. (ix) Internet- Numerous of the
Company's businesses offer internet-based products and services. Moreover, an
increasing amount of corporate communication occurs over the internet. The
internet is reliant upon telecommunication and data transmission services and,
therefore, it is subject to the telecommunication risks noted above. The
decentralized nature of the internet makes it difficult to obtain assurances
concerning Y2K compliance. (x) SIAC- Investor Services Group has a
relationship with the Securities Industry Automation Corporation ("SIAC") which
provides clearing services for mutual fund trading. Any failure in Y2K
readiness on the part of the SIAC could have a material impact upon the revenue
of ISG which would not be able to process all transactions manually. SIAC is
testing its systems for Y2K readiness and ISG plans to start testing with SIAC
in December of 1998. (xi) Credit Bureaus-Several of the Company's business
units and most of the Company's financial institution clients use the services
of one of the three national credit reporting bureaus. Failure of credit bureau
services for an extended period of time could adversely affect the Company's
ability to deliver certain services to clients.
YEAR 2000 RISKS. Management believes that the most likely Y2K risks relate
to third parties with which it has material relationships. A failure or
disruption of (i) the Company's mission-critical computer systems caused by
third-party hardware / software, (ii) third-party service / network / gateway
providers, or (iii) significant clients for an extended period, could adversely
affect the financial condition and results of operations of the Company.
Moreover, while management believes that its internal "State of
18
<PAGE>
FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Continued)
Readiness" as reflected in the Status Chart indicates that the Company's
mission-critical systems will be Y2K ready in a timely manner, failure to
achieve timely remediation of business units' computer systems that process
client information and transactions would have a material adverse effect on the
Company's business, operations and financial results. However, based on
currently available information, while management anticipates there could be
isolated and intermittent disruptions of various services and interfaces at its
businesses, there is no expectation of extensive or protracted systemic failures
that would have a material adverse effect on the financial condition or results
of operations of the Company.
CONTINGENCY PLANS. Each business unit is developing its own contingency
plans pursuant to Task Force guidelines. There are two types of plans. All of
the Company's major business units have hardware/software contingency plans in
case a supplier of hardware/software product or internally developed systems
used in a business does not have a Y2K ready version in time for implementation
and testing. A second type of contingency plan focuses on business contingency
plans to support the date change event. The Company's units have existing
business contingency plans and other support plans which will be reviewed and
modified as appropriate to support the Y2K date change event. Business
contingency plans for the date change event will be published internally for all
business units by December 31, 1998. It is expected that these plans will be
revised throughout 1999, as the Company completes testing with clients and gains
a better understanding of external third party risks.
REGULATORY SUPERVISION; INDEPENDENT VALIDATION/VERIFICATION. Certain FDC
business units are subject to regulatory oversight and examination with detailed
Y2K requirements and examination processes as described below. (i) FFIEC- The
First Data Resources, First Data Merchant Services and Investor Services Group
units are examined regularly by the Federal Financial Institutions Examination
Council. These examinations occur as part of the FFIEC's Multiregional Data
Processing Servicer program. Recently, the FFIEC has begun including a special
focus on Y2K issues in these general MDPS examinations. In addition to the
general MDPS examinations, the federal banking agencies are conducting separate
supervisory reviews of Y2K planning and conversion efforts by financial
institutions, data processing service providers and third-party software vendors
to financial institutions. FDR, FDMS and ISG have been reviewed by the FFIEC
under these procedures and these reviews will continue on a quarterly basis.
The FFIEC publishes a summary of its results to the financial institution
clients of the business units; however, the Company is prohibited by law from
disclosing the reports, or any conclusions, findings or ratings contained in
such reports. (ii) IRS / Treasury / Inspector General- The Company's Electronic
Funds Tax Processing Services business (part of the CashTax unit) is subject to
oversight and inspection by the IRS, the Treasury Department and the Inspector
General each of which has performed specific Y2K inspections regarding the EFTPS
business. (iii) SEC- Certain corporate entities in the Company's Investor
Services Group business are subject to regulation by the Securities and Exchange
Commission as a Transfer Agent and/or as a Broker-Dealer. ISG has filed interim
status reports with the SEC regarding Y2K compliance.
The Audit Committee of the Board of Directors engaged the Gartner Group to
(i) provide an independent analysis of the Company's Y2K preparedness and the
adequacy of its project plans, including project organization, tools,
methodology, implementation strategies and test plan / environment; (ii) examine
the Y2K project progress of each unit; and (iii) regularly report its findings
to executive management and the Board of Directors. The Gartner Group reviews,
among numerous other criteria, whether adequate resources and funding are
committed to the readiness plan and whether the Company has mitigated the risk
of revenue-interrupting failures in their IT systems. Management believes the
Gartner Group's independent evaluations of the Company's Y2K readiness are
consistent with the Status Chart and management's belief that mission-critical
systems will be Y2K ready in a timely manner.
19
<PAGE>
FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Continued)
COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES. Through September 30,
1998, the Company has spent in aggregate approximately $83 million in connection
with preparing for the Year 2000, of which approximately $50 million was spent
in the first three quarters of 1998. The Company anticipates that Y2K
expenditures for the remainder of 1998 will be approximately $25 million. Of
the 1998 spending, approximately 87% has been spent on software remediation and
testing and approximately 13% has been spent to replace systems and equipment
and to add testing capacity. The Company anticipates that Y2K expenses will be
approximately 10% of the IT budget for 1998. The Company anticipates that Y2K
expenditures for 1999 will be approximately $80-95 million, most of which is
budgeted to support client testing. The increase in anticipated 1999 Y2K
spending from prior estimates reflects increased client testing requirements and
resulting increases in the Company's client testing support infrastructure. To
date, the Company has financed its Y2K expenses from cash flow and expects to
continue to do so.
The Company's Y2K efforts have impacted finite IT resources and some
portion of the Company's IT personnel have been dedicated to the Y2K project who
otherwise could have worked on other system enhancements, client conversions and
new products. However, the Company has leveraged its IT resources by engaging
off-shore contract programmers to perform a substantial portion of this work
and, throughout the Company, every effort has been made to prioritize IT
projects and to focus available IT resources on the most critical projects. The
Company has reviewed new business opportunities, product launches and
conversions and either accelerated or deferred these developments, as
appropriate, in response to Y2K efforts.
EURO CURRENCY CONVERSION DISCLOSURE
The Company's First Data Resources Limited ("FDRL") and Western Union
business units provide services in the European Community.
Over ninety percent of FDRL's business relates to credit card issuer and
merchant processing of transactions that occur in the United Kingdom. The United
Kingdom will not be a "participating country" with respect to the January 1,
1999 "euro" currency conversion and it currently is not known when or if the
United Kingdom will elect to convert to the euro. Nonetheless, FDRL's card
issuer system is capable of processing euro-denominated transactions and its
merchant processing system is expected to be ready to process such transactions
in November 1998. Various alternatives are available to convert card issuing and
merchant processing clients to euro-denominated transaction systems. The Company
does not believe that FDRL's costs in connection with the euro conversion will
be material. FDRL currently does not believe that the conversion will have a
competitive impact on its business, though over the long-term the conversion may
present opportunities for FDRL to enter new markets.
Western Union is making minor system modifications to accommodate the euro
conversion which currently are expected to be completed in December 1998.
Costs of these modifications will not be material. While Western Union may
experience a decrease in foreign exchange revenue from money transfers between
countries participating in the euro conversion, any such impact will be
immaterial. Western Union does not anticipate any competitive impact resulting
from the euro conversion.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- ------------------------------------------------------------------
There have been no material changes from the 1997 Annual Report on Form 10-K
related to the Company's exposure to market risk from interest rates.
20
<PAGE>
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Stockholders and Board of Directors
First Data Corporation
We have reviewed the accompanying consolidated balance sheet of First Data
Corporation as of September 30, 1998 and the related consolidated statements of
income and cash flows for the three-month and nine-month periods ended September
30, 1998 and 1997. These financial statements are the responsibility of the
Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, which will be
performed for the full year with the objective of expressing an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying consolidated financial statements referred to above
for them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of First Data Corporation as of
December 31, 1997, and the related consolidated statements of income,
stockholders' equity, and cash flows for the year then ended (not presented
herein) and in our report dated February 5, 1998, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying consolidated balance sheet as of
December 31, 1997, is fairly stated, in all material respects, in relation to
the consolidated balance sheet from which it has been derived.
Ernst & Young LLP
Atlanta, Georgia
November 11, 1998
21
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-----------------
From time to time the Company is involved in various litigation matters arising
in the ordinary course of its business. None of these matters, either
individually or in the aggregate, currently is material to the Company except
for the matters reported in the Company's Annual Report on Form 10-K for the
year ended December 31, 1997 (the "Annual Report"), and the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1998. There were no
material developments in the litigation matters previously disclosed except as
follows.
As previously reported in the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998, The United States District Court for the Central
District of California granted the Company's motion to dismiss the Plaintiff's
complaint in the Garcia litigation previously described in the Annual Report.
The dismissal was with leave to amend within thirty days. Rather than amend the
pleading, the Plaintiff filed a revised complaint on September 14, 1998, in the
Superior Court of the State of California for the County of Los Angeles based on
the same factual allegations described in the Annual Report. The Plaintiff
seeks a preliminary and permanent injunction, the imposition of a constructive
trust, an accounting, restitution, statutory damages, exemplary damages,
punitive damages, compensatory damages alleged to be in excess of $500,000,000,
attorneys' fees, cost of suit, and prejudgment interest.
On October 19, 1998, another Plaintiff filed a putative class action against the
Company's subsidiary Western Union Financial Services, Inc. on behalf of himself
and others similarly situated within the State of Texas in the District Court of
Hidalgo County, Texas. Plaintiff alleged that Western Union charges an
undisclosed "commission" when they transmit consumers' money by wire to
International locations, in that the exchange rate used in these transactions is
less favorable than the exchange rate that Western Union receives when it trades
dollars in the international money market. Plaintiff also alleged that Western
Union failed to disclose this "commission" in their advertising and in the
transactions in violation of state law. Plaintiff seeks declaratory, equitable,
and injunctive relief; all purported general and specific damages suffered by
each class member; punitive damages; attorneys' fees; and costs of suit. While
the allegations are violations of state law for transfers to any international
location, the claims made in the complaint are similar to the claims made in the
legal proceedings previously disclosed in the Company's Annual Report on Form
10-K for the year ended December 31, 1997, and the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1998, all as updated herein and in the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.
ITEM 5. OTHER INFORMATION
-----------------
Pursuant to rules adopted by the Securities and Exchange Commission ("SEC"), the
Company must receive a shareholder proposal by November 26, 1998 to be
considered for inclusion in the Company's 1999 Proxy Statement. The Company's
Bylaws also establish an advance notice procedure for matters intended to be
presented at an annual meeting of shareholders. Pursuant to the Company's
Bylaws, only those shareholder proposals and nominations of persons for election
to the Board of Directors properly presented in accordance with the Bylaws
between January 13, 1999 and February 12, 1999 may be considered at the 1999
Annual Meeting of Shareholders. If a proper shareholder proposal is received by
the Company during this period, and the proposal is not included in the 1999
proxy statement as a matter to be considered by shareholders subject to certain
exceptions, the Company may exercise discretionary authority when voting on the
proposal if it advises shareholders on the nature of the proposal and how it
intends to exercise its discretion in voting on the proposal.
22
<PAGE>
PART II. OTHER INFORMATION
All proposals and nominations should be directed to Michael T. Whealy, Corporate
Secretary, First Data Corporation, 5660 New Northside Drive, Suite 1400,
Atlanta, Georgia, 30328.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
--------
3 By-Laws of First Data Corporation, dated September 23, 1998
12 Computation of Ratio of Earnings to Fixed Charges
15 Letter from Ernst & Young LLP Regarding Unaudited Interim
Financial Information
27.1 Financial Data Schedule (for SEC use only)
99.1 Private Securities Litigation Reform Act of 1995
Safe Harbor Compliance Statement for Forward-Looking Statements
99.2 Amendment No. 1 to the First Data Corporation Supplemental Savings
Plan (the Supplemental Savings Plan was previously filed as an
exhibit to the Company's Registration Statement on Form S-8 filed
on July 29, 1996 (File Number 333-9031))
99.3 Amendment No. 2 to the First Data Corporation Supplemental Savings
Plan (the Supplemental Savings Plan was previously filed as an
exhibit to the Company's Registration Statement on Form S-8 filed
on July 29, 1996 (File Number 333-9031))
(b) Reports on Form 8-K
-------------------
None.
23
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST DATA CORPORATION
----------------------
(Registrant)
Date: November 16, 1998 By /s/ Lee Adrean
------------------ ---------------
Lee Adrean
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: November 16, 1998 By /s/ J. Allen Berryman
----------------- ----------------------
J. Allen Berryman
Vice President and
Corporate Controller
(Principal Accounting Officer)
24
<PAGE>
FIRST DATA CORPORATION
INDEX TO EXHIBITS
-----------------
Exhibit
Number Description
- ------ -----------
3 By-Laws of First Data Corporation, dated September 23, 1998
12 Statement Regarding Computation of Ratio of Earnings to Fixed Charges
15 Letter regarding Unaudited Interim Financial Information
27.1 Financial Data Schedule (for SEC use only)
99.1 Private Securities Litigation Reform Act of 1995
Safe Harbor Compliance Statement for Forward-Looking Statements
99.2 Amendment No. 1 to the First Data Corporation Supplemental Savings
Plan (the Supplemental Savings Plan was previously filed as an exhibit
to the Company's Registration Statement Form S-8 filed on July 29,
1996 (File Number 333-9031)).
99.3 Amendment No. 2 to the First Data Corporation Supplemental Savings
Plan (the Supplemental Savings Plan was previously filed as an exhibit
to the Company's Registration Statement Form S-8 filed on July 29,
1996 (File Number 333-9031)).
25
<PAGE>
EXHIBIT 3
As Adopted September 23, 1998
BY-LAWS
OF
FIRST DATA CORPORATION
(hereinafter called the "Corporation")
ARTICLE I
OFFICES
-------
Section 1. Registered Office. The registered office of the
--------- -----------------
Corporation shall be in the City of Wilmington, County of New Castle, State of
Delaware.
Section 2. Other Offices. The Corporation also may have offices at
--------- -------------
such other places both within and without the State of Delaware as the Board of
Directors may from time to time determine.
ARTICLE II
MEETINGS OF STOCKHOLDERS
------------------------
Section 1. Place of Meetings. Meetings of the stockholders for the
--------- -----------------
election of directors or for any other purpose shall be held at such time and
place, either within or without the State of Delaware as shall be designated
from time to time by the Board of Directors and stated in the notice of the
meeting or in a duly executed waiver of notice thereof.
Section 2. Annual Meetings. The Annual Meetings of Stockholders
--------- ---------------
shall be held on such date and at such time as shall be designated from time to
time by the Board of Directors and stated in the notice of the meeting, at which
meetings the stockholders shall elect by a plurality vote a Board of Directors,
and transact such other business as may properly be brought before the meeting.
Written notice of the Annual Meeting stating the place, date and hour of the
meeting shall be given to each stockholder entitled to vote at such meeting not
less than ten nor more than sixty days before the date of the meeting.
Section 3. Special Meetings. Unless otherwise prescribed by law or
--------- ----------------
by the Restated Certificate of Incorporation (including any Certificates of
Designation with respect to any Preferred Stock, the "Certificate of
Incorporation"), Special Meetings of Stockholders, for any purpose or purposes,
may be called by (i) the Chairman of the Board of Directors, (ii) the Chief
Executive Officer (iii) the President, if there be one, (iv) the Secretary,
(v) the Chairman of the Executive Committee, or (vi) any such officer at the
request in writing of a majority of the Board of Directors. Such request shall
state the purpose or purposes of the proposed meeting. Written notice of a
Special Meeting stating the place, date and hour of the meeting and the purpose
or purposes for which the meeting is called shall be given not less than ten nor
more than sixty days before the date of the meeting to each stockholder entitled
to vote at such meeting.
Section 4. Quorum. Except as otherwise provided by law or by the
--------- ------
Certificate of Incorporation, the holders of a majority of the capital stock
issued and outstanding and entitled to vote thereat, present in person or
represented by proxy, shall constitute a quorum at all meetings of the
<PAGE>
stockholders for the transaction of business. If, however, such quorum shall
not be present or represented at any meeting of the stockholders, the
stockholders entitled to vote thereat, present in person or represented by
proxy, shall have power to adjourn the meeting from time to time, without notice
other than announcement at the meeting, until a quorum shall be present or
represented. At such adjourned meeting at which a quorum shall be present or
represented, any business may be transacted which might have been transacted at
the meeting as originally noticed. If the adjournment is for more than thirty
days, or if after the adjournment a new record date is fixed for the adjourned
meeting, a notice of the adjourned meeting shall be given to each stockholder
entitled to vote at the meeting.
Section 5. Voting. Unless otherwise required by law, the Certificate
--------- ------
of Incorporation or these By-Laws, all voting shall be conducted in accordance
with this Section 5. Directors shall be elected by a plurality of the votes of
the shares present in person or represent by proxy at the meeting and entitled
to vote on the election of directors. In all matters other than the election of
directors, the affirmative vote of the majority of shares present in person or
represented by proxy at the meeting and entitled to vote on the subject matter
shall be the act of the stockholders. Each stockholder represented at a meeting
of stockholders shall be entitled to cast one vote for each share of the capital
stock entitled to vote thereat held by such stockholder or such other vote as
set forth in the Certificate of Incorporation. Such votes may be cast in person
or by proxy but no proxy shall be voted on or after three years from its date,
unless such proxy provides for a longer period. The Board of Directors, in its
discretion, or the officer of the Corporation presiding at a meeting of
stockholders, in such officer's discretion, may require that any votes cast at
such meeting shall be cast by written ballot.
Section 6. List of Stockholders Entitled to Vote. The officer of the
--------- -------------------------------------
Corporation who has charge of the stock ledger of the Corporation shall prepare
and make, at least ten days before every meeting of stockholders, a complete
list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder of the Corporation who is
present.
Section 7. Stock Ledger. The stock ledger of the Corporation shall
--------- ------------
be the only evidence as to who are the stockholders entitled to examine the
stock ledger, the list required by Section 6 of this Article II or the books of
the Corporation, or to vote in person or by proxy at any meeting of
stockholders.
Section 8. Nomination of Directors. Only persons who are nominated
--------- -----------------------
in accordance with the following procedures shall be eligible for election as
directors of the Corporation, except as may be otherwise provided in the
Certificate of Incorporation of the Corporation with respect to the right of
holders of preferred stock of the Corporation to nominate and elect a specified
number of directors in certain circumstances. Nominations of persons for
election to the Board of Directors may be made at any annual meeting of
stockholders (a) by or at the direction of the Board of Directors (or any duly
authorized committee thereof) or (b) by any stockholder of the Corporation (i)
who is a stockholder of record on the date of the giving of the notice provided
for in this Section 8 and on the record date for the determination of
stockholders entitled to vote at such annual meeting and (ii) who complies with
the notice procedures set forth in this Section 8.
<PAGE>
In addition to any other applicable requirements, for a nomination to be made by
a stockholder, such stockholder must have given timely notice thereof in proper
written form to the Secretary of the Corporation.
To be timely, a stockholder's notice to the Secretary must be delivered to or
mailed and received at the principal executive offices of the Corporation not
less than ninety (90) days nor more than one hundred twenty (120) days prior to
the anniversary date of the immediately preceding annual meeting of
stockholders; provided, however, that in the event that the annual meeting is
-----------------
called for a date that is not within thirty (30) days before or after such
anniversary date, notice by the stockholder in order to be timely must be so
received not later than the close of business on the tenth (10th) day following
the day on which such notice of the date of the annual meeting was mailed or
such public disclosure of the date of the annual meeting was made, whichever
first occurs.
To be in proper written form, a stockholder's notice to the Secretary must set
forth (a) as to each person whom the stockholder proposes to nominate for
election as a director (i) the name, age, business address and residence address
of the person, (ii) the principal occupation or employment of the person, (iii)
the class or series and number of shares of capital stock of the Corporation
which are owned beneficially or of record by the person and (iv) any other
information relating to the person that would be required to be disclosed in a
proxy statement or other filings required to be made in connection with
solicitations of proxies for election of directors pursuant to Section 14 of the
Exchange Act, and the rules and regulations promulgated thereunder; and (b) as
to the stockholder giving the notice (i) the name and record address of such
stockholder, (ii) the class or series and number of shares of capital stock of
the Corporation which are owned beneficially or of record by such stockholder,
(iii) a description of all arrangements or understandings between such
stockholder and each proposed nominee and any other person or persons (including
their names) pursuant to which the nomination(s) are to be made by such
stockholder, (iv) a representation that such stockholder intends to appear in
person or by proxy at the annual meeting to nominate the persons named in its
notice and (v) any other information relating to such stockholder that would be
required to be disclosed in a proxy statement or other filings required to be
made in connection with solicitations of proxies for election of directors
pursuant to Section 14 of the Exchange Act and the rules and regulations
promulgated thereunder. Such notice must be accompanied by a written consent of
each proposed nominee to being named as a nominee and to serve as a director if
elected.
No person shall be eligible for election as a director of the Corporation unless
nominated in accordance with the procedures set forth in this Section 8. If the
Chairman of the annual meeting determines that a nomination was not made in
accordance with the foregoing procedures, the Chairman shall declare to the
meeting that the nomination was defective and such defective nomination shall be
disregarded.
Section 9. Business at Annual Meetings. No business may be
--------- ---------------------------
transacted at an annual meeting of stockholders, other than business that is
either (a) specified in the notice of meeting (or any supplement thereto) given
by or at the direction of the Board of Directors (or any duly authorized
committee thereof), (b) otherwise properly brought before the annual meeting by
or at the direction of the Board of Directors (or any duly authorized committee
thereof) or otherwise properly brought before the annual meeting by any
stockholder of the Corporation (i) who is a stockholder of record on the date of
the giving of the notice provided for in this Section 9 and on the record date
for the determination of stockholders entitled to vote at such annual meeting
and (ii) who complies with the notice procedures set forth in this Section 9.
<PAGE>
In addition to any other applicable requirements, for business to be properly
brought before an annual meeting by a stockholder, such stockholder must have
given timely notice thereof in proper written form to the Secretary of the
Corporation.
To be timely, a stockholder's notice to the Secretary must be delivered to or
mailed and received at the principal executive offices of the Corporation not
less than ninety (90) days nor more than one hundred twenty (120) days prior to
the anniversary date of the immediately preceding annual meeting of
stockholders; provided, however, that in the event that the annual meeting is
-----------------
called for a date that is not within thirty (30) days before or after such
anniversary date, notice by the stockholder in order to be timely must be so
received not later than the close of business on the tenth (10th) day following
the day on which such notice of the date of the annual meeting was mailed or
such public disclosure of the date of the annual meeting was made, whichever
first occurs.
To be in proper written form, a stockholder's notice to the Secretary must set
forth as to each matter such stockholder proposes to bring before the annual
meeting (i) a brief description of the business desired to be brought before the
annual meeting and the reasons for conducting such business at the annual
meeting, (ii) the name and record address of such stockholder, (iii) the class
or series and number of shares of capital stock of the Corporation which are
owned beneficially or of record by such stockholder, (iv) a description of all
arrangements or understandings between such stockholder and any other person or
persons (including their names) in connection with the proposal of such business
by such stockholder and any material interest of such stockholder in such
business and (v) a representation that such stockholder intends to appear in
person or by proxy at the annual meeting to bring such business before the
meeting.
No business shall be conducted at the annual meeting of stockholders except
business brought before the annual meeting in accordance with the procedures set
forth in this Section 9, provided, however, that, once business has been
-----------------
properly brought before the annual meeting in accordance with such procedures,
nothing in this Section 9 shall be deemed to preclude discussion by any
stockholder of any such business. If the Chairman of an annual meeting
determines that business was not properly brought before the annual meeting in
accordance with the foregoing procedures, the Chairman shall declare to the
meeting that the business was not properly brought before the meeting and such
business shall not be transacted.
ARTICLE III
DIRECTORS
---------
Section 1. Number and Election of Directors. The Board of Directors
--------- --------------------------------
shall consist of not less than one nor more than fifteen members, the exact
number of which shall be fixed from time to time by resolution adopted by
affirmative vote of a majority of the entire Board of Directors. The directors
shall be divided into three classes, designated Class I, Class II and Class III,
as provided in the Certificate of Incorporation. Any director may resign at any
time upon notice to the Corporation. Directors need not be stockholders.
Section 2. Vacancies. Any vacancy on the Board of Directors may be
--------- ---------
filled in accordance with Section 223 of the General Corporation Law of the
State of Delaware; provided, however, that vacancies and newly created
-------- -------
directorships resulting from any increase in the authorized number of directors
may only be filled by a majority of the directors then in office, though less
than a quorum, or by a sole remaining director, and the directors so chosen
shall hold office until the next election for such class and until their
successors are duly elected and qualified, or until their earlier resignation or
removal.
<PAGE>
Section 3. Duties and Powers. The business of the Corporation shall
--------- -----------------
be managed by or under the direction of the Board of Directors which may
exercise all such powers of the Corporation and do all such lawful acts and
things as are not by statute or by the Certificate of Incorporation or by these
By-Laws directed or required to be exercised or done by the stockholders.
Section 4. Meetings. The Board of Directors of the Corporation may
--------- --------
hold meetings, both regular and special, either within or without the State of
Delaware. Regular meetings of the Board of Directors may be held without notice
at such time and at such place as may from time to time be determined by the
Board of Directors. Special meetings of the Board of Directors may be called by
the Chairman, the Controlling Officer or any directors. Notice thereof stating
the place, date and hour of the meeting shall be given to each director either
by mail not less than forty-eight (48) hours before the date of the meeting, by
telephone, telegram or in person on twenty-four (24) hours' notice, or on such
shorter notice as the person or persons calling such meeting may deem necessary
or appropriate in the circumstances.
Section 5. Quorum. Except as may be otherwise specifically provided
--------- ------
by law, the Certificate of Incorporation or these By-Laws, at all meetings of
the Board of Directors, a majority of the entire Board of Directors shall
constitute a quorum for the transaction of business and the act of a majority of
the directors present at any meeting at which there is a quorum shall be the act
of the Board of Directors. If a quorum shall not be present at any meeting of
the Board of Directors, the directors present thereat may adjourn the meeting
from time to time, without notice other than announcement at the meeting, until
a quorum shall be present.
Section 6. Actions of Board. Unless otherwise provided by the
--------- ----------------
Certificate of Incorporation or these By-Laws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting, if all the members of the Board of Directors or
committee, as the case may be, consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the Board of Directors or
committee.
Section 7. Meetings by Means of Conference Telephone. Unless
--------- -----------------------------------------
otherwise provided by the Certificate of Incorporation or these By-Laws, members
of the Board of Directors of the Corporation, or any committee designated by the
Board of Directors, may participate in a meeting of the Board of Directors or
such committee by means of a conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and participation in a meeting pursuant to this Section 7 shall
constitute presence in person at such meeting.
Section 8. Committees. The Board of Directors may, by resolution
--------- ----------
passed by a majority of the entire Board of Directors, designate one or more
committees, each committee to consist of one or more of the directors of the
Corporation. The Board of Directors may designate one or more directors as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of any such committee. In the absence or disqualification
of a member of a committee, and in the absence of a designation by the Board of
Directors of an alternate member to replace the absent or disqualified member,
the member or members thereof present at any meeting and not disqualified from
voting, whether or not the member or members constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any absent or disqualified member. Any committee, to
the extent allowed by law and provided in the resolution establishing such
committee, shall have and may exercise all the powers and authority of the Board
of Directors in the management of the business and
<PAGE>
affairs of the Corporation. Each committee shall keep regular minutes and report
to the Board of Directors when required.
Section 9. Compensation. The directors may be paid their expenses,
--------- ------------
if any, of attendance at each meeting of the Board of Directors and may be paid
a fixed sum for attendance at each meeting of the Board of Directors or a stated
salary as director. No such payment shall preclude any director from serving
the Corporation in any other capacity and receiving compensation therefor.
Members of special or standing committees may be allowed like compensation for
attending committee meetings.
ARTICLE IV
OFFICERS
--------
Section 1. General. The officers of the Corporation shall be chosen
--------- -------
by the Board of Directors and there shall be a Chairman of the Board of
Directors (who must be a director), a Secretary and a Treasurer. The Board of
Directors, in its discretion, also may choose a Chief Executive Officer,
President and one or more Vice Presidents, Assistant Secretaries, Assistant
Treasurers and other officers. Any number of offices may be held by the same
person, unless otherwise prohibited by law, the Certificate of Incorporation or
these By-Laws. The officers of the Corporation need not be stockholders of the
Corporation nor, except in the case of the Chairman of the Board of Directors,
need such officers be directors of the Corporation.
Section 2. Election. The Board of Directors at its first meeting
--------- --------
held after each Annual Meeting of Stockholders shall elect the officers of the
Corporation who shall hold their offices for such terms and shall exercise such
powers and perform such duties as shall be determined from time to time by the
Board of Directors and all officers of the Corporation shall hold office until
their successors are chosen and qualified, or until their earlier resignation or
removal. Any vacancy occurring in any office of the Corporation shall be filled
by the Board of Directors. The salaries of all officers of the Corporation
shall be fixed by the Board of Directors.
Section 3. Voting Securities Owned by the Corporation. Powers of
--------- ------------------------------------------
attorney, proxies, waivers of notice of meeting, consents and other instruments
relating to securities owned by the Corporation may be executed in the name of
and on behalf of the Corporation by any officer of the Corporation and any such
officer may, in the name of and on behalf of the Corporation, take all such
action as any such officer may deem advisable to vote in person or by proxy at
any meeting of security holders of any corporation in which the Corporation may
own securities and at any such meeting shall possess and may exercise any and
all rights and power incident to the ownership of such securities and which, as
the owner thereof, the Corporation might have exercised and possessed if
present. The Board of Directors may, by resolution, from time to time confer
like powers upon any other person or persons.
Section 4. Chairman of the Board of Directors. The Chairman of the
--------- ----------------------------------
Board of Directors shall preside at all meetings of the stockholders and of the
Board of Directors. Except where by law the signature of the Chief Executive
Officer or President is required, the Chairman of the Board of Directors shall
possess the same power as the Chief Executive Officer and President to sign all
contracts, certificates and other instruments of the Corporation which may be
authorized by the Board of Directors. The Chairman of the Board of Directors
shall also perform such other duties and may exercise such other powers as from
time to time may be assigned to the Chairman by these By-Laws or by the Board of
Directors.
<PAGE>
Section 5. Chief Executive Officer. At the request of the Chairman
--------- -----------------------
of the Board of Directors or in such person's absence or in the event of such
person's inability or refusal to act, the Chief Executive Officer, if not also
the Chairman of the Board of Directors, and then the President, if there be one,
shall perform the duties of the Chairman of the Board of Directors, and when so
acting, shall have all the powers of and be subject to all the restrictions upon
the Chairman of the Board of Directors. The Chief Executive Officer, or in such
person's absence or in the event of such person's inability or refusal to act,
the President, if there be one (such person, the "Controlling Officer"), shall,
subject to the control of the Board of Directors and the Chairman of the Board
of Directors, have general supervision of the business of the Corporation and
shall see that all orders and resolutions of the Board of Directors are carried
into effect. The Controlling Officer shall execute all bonds, mortgages,
contracts and other instruments of the Corporation requiring a seal, under the
seal of the Corporation, except where required or permitted by law to be
otherwise signed and executed and except that the other officers of the
Corporation may sign and execute documents when so authorized by these By-Laws,
the Board of Directors or the Controlling Officer. In the absence or disability
of the Chairman of the Board of Directors, the Controlling Officer shall preside
at all meetings of the stockholders and the Board of Directors. The Controlling
Officer shall also perform such other duties and may exercise such other powers
as from time to time may be assigned to such person by these By-Laws or by the
Board of Directors.
Section 6. Controlling Officer Succession. At the request of the
--------- ------------------------------
Controlling Officer, in their absence, in the event of their inability or
refusal to act, or if there is no Controlling Officer, the officer designated by
the Board of Directors) shall perform the duties of the Controlling Officer and
when so acting, shall have all the powers of and be subject to all the
restrictions upon the Controlling Officer.
Section 7. Secretary. The Secretary, or an Assistant Secretary,
--------- ---------
shall attend all meetings of the Board of Directors and all meetings of
stockholders and record all the proceedings thereat in a book or books to be
kept for that purpose; the Secretary, or an Assistant Secretary, also shall
perform like duties for the standing committees when required. The Secretary,
or an Assistant Secretary, shall give, or cause to be given, notice of all
meetings of the stockholders and special meetings of the Board of Directors, and
shall perform such other duties as may be prescribed by the Board of Directors,
the Chairman of the Board of Directors, or the Controlling Officer under whose
supervision the Secretary and Assistant Secretaries shall be. If the Secretary
and all Assistant Secretaries are unable or shall refuse to cause to be given
notice of all meetings of the stockholders and special meetings of the Board of
Directors, then the Board of Directors, the Chairman of the Board of Directors
or the Controlling Officer may choose another officer to cause such notice to be
given. The Secretary shall have custody of the seal of the Corporation and the
Secretary or any Assistant Secretary, if there be one, shall have authority to
affix the same to any instrument requiring it and when so affixed, it may be
attested by the signature of the Secretary or by the signature of any such
Assistant Secretary. The Board of Directors may give general authority to any
other officer to affix the seal of the Corporation and to attest the affixing by
such officer's signature. The Secretary shall see that all books, reports,
statements, certificates and other documents and records required by law to be
kept or filed are properly kept or filed, as the case may be.
Section 8. Treasurer. The Treasurer shall have the custody of the
--------- ---------
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Corporation and shall
deposit all moneys and other valuable effects in the name and to the credit of
the Corporation in such depositories as may be designated by the Board of
Directors. The Treasurer shall disburse the funds of the Corporation as may be
ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the Controlling Officer and the Board of
Directors, at its regular meetings, or when the Board of Directors so requires,
an account of all such officer's transactions
<PAGE>
as Treasurer and of the financial condition of the Corporation. If required by
the Board of Directors, the Treasurer shall give the Corporation a bond in such
sum and with such surety or sureties as shall be satisfactory to the Board of
Directors for the faithful performance of the duties of the office and for the
restoration to the Corporation, in case of such person's death, resignation,
retirement or removal from office, of all books, papers, vouchers, money and
other property of whatever kind in his possession or under his control belonging
to the Corporation.
Section 9. Assistant Secretaries. Except as may be otherwise
--------- ---------------------
provided in these By-Laws, Assistant Secretaries, if there be any, shall perform
such duties and have such powers as from time to time may be assigned to them by
the Board of Directors, the Chairman of the Board of Directors, the Controlling
Officer, any Vice President, if there be one, or the Secretary, and in the
absence of the Secretary or in the event of such person's disability or refusal
to act, shall perform the duties of the Secretary, and when so acting, shall
have all the powers of and be subject to all the restrictions upon the
Secretary.
Section 10. Assistant Treasurers. Assistant Treasurers, if there be
---------- --------------------
any, shall perform such duties and have such powers as from time to time may be
assigned to them by the Board of Directors, the Chairman of the Board of
Directors, Controlling Officer, any Vice President, if there be one, or the
Treasurer, and in the absence of the Treasurer or in the event of such person's
disability or refusal to act, shall perform the duties of the Treasurer, and
when so acting, shall have all the powers of and be subject to all the
restrictions upon the Treasurer. If required by the Board of Directors, an
Assistant Treasurer shall give the Corporation a bond in such sum and with such
surety or sureties as shall be satisfactory to the Board of Directors for the
faithful performance of the duties of the office and for the restoration to the
Corporation, in case of such person's death, resignation, retirement or removal
from office, of all books, papers, vouchers, money and other property of
whatever kind in such person's possession or under such person's control
belonging to the Corporation.
Section 11. Other Officers. Such other officers as the Board of
---------- --------------
Directors may choose shall perform such duties and have such powers as from time
to time may be assigned to them by the Board of Directors. The Board of
Directors may delegate to any other officer of the Corporation the power to
choose such other officers and to prescribe their respective duties and powers.
ARTICLE V
STOCK
-----
Section 1. Form of Certificates. Every holder of stock in the
--------- --------------------
Corporation shall be entitled to have a certificate signed, in the name of the
Corporation (i) by the Chairman of the Board of Directors, the Chief Executive
Officer, the President or a Vice President and (ii) by the Treasurer or an
Assistant Treasurer, or the Secretary or an Assistant Secretary of the
Corporation, certifying the number of shares owned by such holder in the
Corporation.
Section 2. Signatures. Any signature required to be on a certificate
--------- ----------
may be a facsimile. In case any officer, transfer agent or registrar who has
signed or whose facsimile signature has been placed upon a certificate shall
have ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the Corporation with the same effect
as if such person were such officer, transfer agent or registrar at the date of
issue.
<PAGE>
Section 3. Lost Certificates. The Board of Directors may direct a
--------- -----------------
new certificate to be issued in place of any certificate theretofore issued by
the Corporation alleged to have been lost, stolen or destroyed, upon the making
of an affidavit of that fact by the person claiming the certificate of stock to
be lost, stolen or destroyed. When authorizing such issue of a new certificate,
the Board of Directors may, in its discretion and as a condition precedent to
the issuance thereof, require the owner of such lost, stolen or destroyed
certificate, or his legal representative, to advertise the same in such manner
as the Board of Directors shall require and/or to give the Corporation a bond in
such sum as it may direct as indemnity against any claim that may be made
against the Corporation with respect to the certificate alleged to have been
lost, stolen or destroyed.
Section 4. Transfers. Stock of the Corporation shall be transferable
--------- ---------
in the manner prescribed by law and in these By-Laws. Transfers of stock shall
be made on the books of the Corporation only by the person named in the
certificate or by his attorney lawfully constituted in writing and upon the
surrender of the certificate therefor, which shall be canceled before a new
certificate shall be issued.
Section 5. Record Date. In order that the Corporation may determine
--------- -----------
the stockholders entitled to notice of or to vote at any meeting of stockholders
or any adjournment thereof, or entitled to receive payment of any dividend or
other distribution or allotment of any rights, or entitled to exercise any
rights in respect of any change, conversion or exchange of stock, or for the
purpose of any other lawful action, the Board of Directors may fix, in advance,
a record date, which shall not be more than sixty days nor less than ten days
before the date of such meeting, nor more than sixty days prior to any such
other corporate action. A determination of stockholders of record entitled to
notice of or to vote at a meeting of stockholders shall apply to any adjournment
of the meeting; provided, however, that the Board of Directors may fix a new
record date for the adjourned meeting.
Section 6. Beneficial Owners. The Corporation shall be entitled to
--------- -----------------
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and to hold liable
for calls and assessments a person registered on its books as the owner of
shares, and shall not be bound to recognize any equitable or other claim to or
interest in such share or shares on the part of any other person, whether or not
it shall have express or other notice thereof, except as otherwise provided by
law.
ARTICLE VI
NOTICES
-------
Section 1. Notices. Whenever written notice is required by law, the
--------- -------
Certificate of Incorporation or these By-Laws, to be given to any director,
member of a committee or stockholder, such notice may be given by mail,
addressed to such director, member of a committee or stockholder, at his address
as it appears on the records of the Corporation, with postage thereon prepaid,
and such notice shall be deemed to be given at the time when the same shall be
deposited in the United States mail. Written notice may also be given
personally or by telegram, facsimile, telex, cable, e-mail or electronic means.
Section 2. Waivers of Notice. Whenever any notice is required by
--------- -----------------
law, the Certificate of Incorporation or these By-Laws, to be given to any
director or member of a committee, a waiver thereof in writing, signed by the
person or persons entitled to said notice, whether before or after the time
stated therein, shall be deemed equivalent thereto.
<PAGE>
ARTICLE VII
GENERAL PROVISIONS
------------------
Section 1. Dividends. Dividends upon the capital stock of the
--------- ---------
Corporation, subject to the provisions of the Certificate of Incorporation, if
any, may be declared by the Board of Directors at any regular or special
meeting, and may be paid in cash, in property, or in shares of the capital
stock. Before payment of any dividend, there may be set aside out of any funds
of the Corporation available for dividends such sum or sums as the Board of
Directors from time to time, in its absolute discretion, deems proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the Corporation, or for any proper
purpose, and the Board of Directors may modify or abolish any such reserve.
Section 2. Disbursements. All checks or demands for money and notes
--------- -------------
of the Corporation shall be signed by such officer or officers or such other
person or persons as the Board of Directors may from time to time designate.
Section 3. Fiscal Year. The fiscal year of the Corporation shall be
--------- -----------
fixed by resolution of the Board of Directors.
Section 4. Corporate Seal. The corporate seal shall have inscribed
--------- --------------
thereon the name of the Corporation, the year of its organization and the words
"Corporate Seal, Delaware." The seal may be used by causing it or a facsimile
thereof to be impressed or affixed or reproduced or otherwise.
ARTICLE VIII
INDEMNIFICATION
---------------
Section 1. Power to Indemnify in Actions, Suits or Proceedings other
--------- ---------------------------------------------------------
Than Those by or in the Right of the Corporation. The Corporation shall
- ------------------------------------------------
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action, suit or
proceeding by or in the right of the Corporation) by reason of the fact that the
person is or was a director, officer, or employee of the Corporation, or is or
was a director, officer, or employee of the Corporation serving at the request
of the Corporation as a director, officer, employee, or agent of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by the person in
connection with their defense of such action, suit or proceeding if the person
acted in good faith and in a manner the person reasonably believed to be in or
not opposed to the best interests of the Corporation, and, with respect to any
criminal action, suit or proceeding, had no reasonable cause to believe their
conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
---- ----------
its equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which the person reasonably believed to be
in or not opposed to the best interests of the Corporation and, with respect to
any criminal action, suit or proceeding, had no reasonable cause to believe his
conduct was unlawful.
<PAGE>
Section 2. Power to Indemnify in Actions, Suits or Proceedings by or
--------- ---------------------------------------------------------
in the Right of the Corporation. The Corporation shall indemnify any person who
- -------------------------------
was or is a party or is threatened to be made a party to any threatened, pending
or completed action or suit by or in the right of the Corporation to procure a
judgment in its favor by reason of the fact that the person is or was a
director, officer, or employee of the Corporation, or is or was a director,
officer, or employee of the Corporation serving at the request of the
Corporation as a director, officer, employee, or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise
against expenses (including attorneys' fees) actually and reasonably incurred by
the person in connection with their defense of such action or suit if the person
acted in good faith and in a manner the person reasonably believed to be in or
not opposed to the best interests of the Corporation; except that no
indemnification shall be made in respect of any action or suit, nor any claim,
issue or matter therein, as to which such person shall have been adjudged to be
liable to the Corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
Section 3. Prepayment of Expenses. The Corporation shall pay the
---------- ----------------------
actual and reasonable expenses incurred in investigating or defending a
threatened or pending action, suit or proceeding, in advance of its final
disposition if the Corporation determines that the person likely will satisfy
the requirements of Section 1 or 2 of this Article VIII and upon the receipt of
an undertaking satisfactory to the corporation, which may require that such
undertaking include a bond, security interest, or other security for such
undertaking, by or on behalf of such person to repay such amount if it shall
ultimately be determined that the person is not entitled to be indemnified by
the Corporation under this Article VIII.
Section 4. Indemnity if Successful on the Merits. If a person is
--------- -------------------------------------
entitled, under state law or otherwise, to indemnification by reason of being
successful on the merits in defense of any action, suit or proceeding, the
Corporation shall indemnify that person if they obtain a final judgment or
decision in their favor for the entirety of the case.
Section 5. Exercise of Powers. Any indemnification under this
--------- ------------------
Article VIII (unless ordered by a court) shall be made by the Corporation only
as authorized in the specific case upon a determination that indemnification of
the director, officer, or employee is proper in the circumstances because the
person has met the applicable standard of conduct set forth in this Article
VIII. Such determination shall be made (i) by a majority vote of the directors
who are not parties to such action, suit or proceeding, even though less than a
quorum, or (ii) by a committee of such directors designated by majority vote of
such directors, even though less than a quorum, or (iii) if there are no such
directors, or if such directors so direct, by independent legal counsel in a
written opinion, or (iv) by majority vote of the stockholders. The exercise of
the power to indemnify and advance expenses by the Corporation pursuant to this
Article VIII shall not be deemed to limit any other exercise or restriction of
such powers by the Corporation. Provided, that any repeal or modification of
this Article VIII shall not adversely affect any right or protection of any
person in respect to any act or omission occurring prior to the time of such
repeal or modification.
Section 6. Indemnification by a Court. Notwithstanding any contrary
--------- --------------------------
determination or absence of determination in a specific case under Section 5 of
this Article VIII, any director, officer, or employee may apply to any court of
competent jurisdiction in the State of Delaware for indemnification to the
extent otherwise permissible under Sections 1, 2 and 4 of this Article VIII.
The basis of such indemnification by a court shall be a determination by such
court that indemnification of the director, officer, or employee is proper in
the circumstances because such person has met the applicable standards of
conduct set forth in Section 1, 2 or 4 of this Article VIII, as the case may be.
Neither a contrary determination nor the absence
<PAGE>
of a determination in a specific case under Section 5 of this Article VIII shall
be a defense to such application or create a presumption that the director,
officer, or employee seeking indemnification has not met any applicable standard
of conduct. Notice of any application for indemnification pursuant to this
Section 6 shall be given to the Corporation promptly upon the filing of such
application.
Section 7. Survival of Indemnification and Advancement of Expenses.
--------- -------------------------------------------------------
The indemnification and advancement of expenses provided by, or granted pursuant
to this Article VIII shall, unless otherwise provided when authorized or
ratified, continue as to a person who has ceased to be a director, officer, or
employee and shall inure to the benefit of the heirs, executors and
administrators of such a person.
Section 8. Insurance. The Corporation may purchase and maintain
---------- ---------
insurance on behalf of any person who is or was a director, officer or employee
of the Corporation or is or was a director, officer or employee of the
Corporation serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise against any liability asserted against
and incurred by such person in any such capacity, or arising out of their status
as such, whether or not the Corporation would have the power or the obligation
to indemnify the person against such liability under the provisions of any
article of incorporation, bylaw, or agreement.
Section 9. Applicable Law. The rights granted under this Article
--------- --------------
VIII shall be limited to the extent any applicable laws limit such rights to
indemnity or the power to indemnify.
Section 10. Certain Definitions. For purposes of this Article VIII
----------- -------------------
the following definitions shall apply.
Acted in good faith and in a manner the person reasonably believed to be in or
not opposed to the best interests of the Corporation and, with respect to any
criminal action, suit or proceeding, had no reasonable cause to believe their
conduct was unlawful@ shall include, but not be limited to, actions based on the
following information from the Corporation or other corporation, partnership,
joint venture, trust, employee benefit plan, or enterprise to which the person
is or was serving at the request of the Corporation (for purposes of this
definition only, an AEnterprise@): records or books of account of the
Corporation or Enterprise, information supplied by an officer of the Corporation
or Enterprise in the course of their duties, advice of legal counsel for the
Corporation or Enterprise, or information or records given or reports made to
the Corporation or Enterprise by an independent certified public accountant,
appraiser or other expert selected with reasonable care by the Corporation or
Enterprise.
Corporation shall include, in addition to the resulting corporation, any
constituent corporation (including any constituent of a constituent) absorbed in
a consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers, or employees
so that any person who is or was a director, officer, or employee of such
constituent corporation, or is or was a director, officer, or employee of such
constituent corporation serving at the request of such constituent corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise, shall stand in
the same position under the provision of this Article VIII with respect to the
resulting or surviving corporation as they would have with respect to such
constituent corporation if its separate existence had continued.
Fines shall include any excise taxes assessed on a person with respect to any
employee benefit plan.
<PAGE>
Not opposed to the best interest of the corporation shall include actions taken
in service to an employee benefit plan that the person reasonably believed to be
in the interest of the participants and beneficiaries of an employee benefit
plan.
ARTICLE IX
AMENDMENTS
----------
Section 1. These By-Laws may be altered, amended or repealed, in
---------
whole or in part, or new By-Laws may be adopted by the stockholders or by the
Board of Directors, provided, however, that notice of such alteration,
amendment, repeal or adoption of new By-Laws be contained in the notice of such
meeting of stockholders or Board of Directors as the case may be. All such
amendments must be approved by either the holders of a majority of the
outstanding capital stock entitled to vote thereon or by a majority of the
entire Board of Directors then in office.
Section 2. Entire Board of Directors. As used in this Article IX and
--------- -------------------------
in these By-Laws generally, the term "entire Board of Directors" means the total
number of directors which the Corporation would have if there were no vacancies.
<PAGE>
EXHIBIT 12
FIRST DATA CORPORATION
COMPUTATION OF
RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in millions)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ---------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Earnings:
Income before income $275.9 $303.2 $553.6 (1) $552.7 (2)
taxes
Interest expense 25.5 29.7 80.3 85.3
Other adjustments 10.1 11.9 32.5 39.8
------ ------ ------ --------
Total earnings (a) $311.5 $344.8 $666.4 $677.8
====== ====== ====== ======
Fixed charges:
Interest expense $ 25.5 $ 29.7 $ 80.3 $ 85.3
Other adjustments 10.1 11.9 32.5 39.8
------ ------ ------ -------
Total fixed charges (b) $ 35.6 $ 41.6 $112.8 $125.1
====== ====== ====== ======
Ratio of earnings to
fixed charges (a/b) 8.75 8.29 5.91 5.42
</TABLE>
(1) Includes provision for loss on contract and impairment charges totaling
$164.1 million. The pro forma ratio of earnings to fixed charges without
these charges would have been 7.36.
(2) Includes restructuring, net loss on business divestitures and impairment
charges of $211.6 million. The pro forma ratio of earnings to fixed
charges without these charges would have been 7.11.
For purposes of computing the ratio of earnings to fixed charges, fixed charges
consist of interest on debt, amortization of deferred financing costs and a
portion of rentals determined to be representative of interest. Earnings
consist of income before income taxes plus fixed charges.
<PAGE>
EXHIBIT 15
November 11, 1998
The Stockholders and Board of Directors
First Data Corporation
We are aware of the incorporation by reference in the Registration Statements
(Forms S-8 No. 33-47234, No. 33-48578, No. 33-82826, No. 33-87338, No. 33-90992,
No. 33-62921, No. 33-98724, No. 33-99882, No. 333-9017, No. 333-9031 and No.
333-28857, Forms S-3 No. 333-4012, No. 333-24667, and Form S-4 No. 333-15497) of
First Data Corporation of our reports dated May 7, 1998 and November 11, 1998
relating to the unaudited consolidated interim financial statements of First
Data Corporation which are included in its Form 10-Q for the quarters ended
March 31, 1998, June 30, 1998 and September 30, 1998.
Pursuant to Rule 436(c) of the Securities Act of 1933 our reports are not a part
of the registration statements prepared or certified by accountants within the
meaning of Section 7 or 11 of the Securities Act of 1933.
Ernst & Young LLP
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 511
<SECURITIES> 0
<RECEIVABLES> 867
<ALLOWANCES> 31
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 834
<DEPRECIATION> 0
<TOTAL-ASSETS> 15,205
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 5
<OTHER-SE> 3,926
<TOTAL-LIABILITY-AND-EQUITY> 15,205
<SALES> 0
<TOTAL-REVENUES> 3,763
<CGS> 0
<TOTAL-COSTS> 3,209
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 125
<INTEREST-EXPENSE> 80
<INCOME-PRETAX> 554
<INCOME-TAX> 190
<INCOME-CONTINUING> 363
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 363
<EPS-PRIMARY> 0.81
<EPS-DILUTED> 0.81
<FN>
<F1>Unclassified Balance Sheet
</FN>
</TABLE>
<PAGE>
EXHIBIT 99.1
Private Securities Litigation Reform Act of 1995
Safe Harbor Compliance Statement for Forward-Looking Statements
- ---------------------------------------------------------------
In passing the Private Securities Litigation Reform Act of 1995 (the
"Reform Act"), Congress encouraged public companies to make "forward-looking
statements"* by creating a safe-harbor to protect companies from securities law
liability in connection with forward-looking statements. First Data Corporation
("FDC") intends to qualify both its written and oral forward-looking statements
for protection under the Reform Act. To qualify oral forward-looking statements
for protection under the Reform Act, a readily available written document must
identify important factors that could cause actual results to differ materially
from those in the forward-looking statements. FDC provides the following
information in connection with its continuing effort to qualify forward-looking
statements for the safe harbor protection of the Reform Act.
Important factors upon which the Company's forward-looking statements are
premised include the following:
. Continued growth at rates approximating recent levels for card-based payment
transactions, consumer money transfer transactions and other product markets.
. Successful implementation of the Company's Year 2000 remediation plans
substantially as scheduled and budgeted as previously disclosed in the Company's
last Annual Report on Form 10-K.
. Successful conversions under service contracts with major new clients.
. Timely and successful implementation of processing systems to provide new
products, improved functionality and increased efficiencies.
. Successful launch of new payment product initiatives including those related
to electronic bill presentment and payment, card-based money transfer products
and retail foreign exchange services.
. Successful implementation of a strategy to improve operating results in the
Information Management Group.
. Absence of consolidation among client financial institutions or other client
groups which has a significant impact on FDC client relationships and no
material loss of business resulting from significant customers of the Company
involved in announced mergers.
. Achieving planned revenue growth throughout the Company, including in the
merchant alliance program which requires a cooperative effort between the
Company and its merchant alliance partners, and successful management of pricing
pressures through cost efficiencies and other cost management initiatives.
. No charges or expenses are incurred by the Company in connection with
organizational changes which might occur following review of the new
organizational structure identified in previous press releases.
. No imposition of a Value Added Tax on third-party credit card processing
services by the European Community, which could put credit card processing
outsourcers at a competitive disadvantage to in-house solutions in the EC.
. No unanticipated changes in laws, regulations, credit card association rules
or other industry standards affecting FDC's businesses which require significant
product redevelopment efforts, reduce the market for or value of its products,
or render products obsolete.
. Continuation of the existing interest rate environment, avoiding increases in
agent fees related to the Company's consumer money transfer products and the
Company's short-term borrowing costs.
. Absence of significant changes in foreign exchange spreads on retail money
transfer transactions, particularly between the United States and Mexico,
without a corresponding increase in volume or consumer fees.
. No unanticipated developments relating to previously disclosed lawsuits
against Western Union, inter alia, violation of consumer protection laws in
connection with advertising the cost of money transfer to Mexico.
. Successfully managing the potential both for patent protection and patent
liability in the context of rapidly developing legal framework for expansive
software patent protection.
Forward-looking statements express expectations of future events. All
forward-looking statements are inherently uncertain as they are based on various
expectations and assumptions concerning future events and they are subject to
numerous known and unknown risks and uncertainties which could cause actual
events or results to differ materially from those projected. Due to these
inherent uncertainties the investment community is urged not to place undue
reliance on forward-looking statements. In addition, FDC undertakes no
obligation to update or revise forward-looking statements to reflect changed
assumptions, the occurrence of unanticipated events, or changes to projections
over time.
*"Forward-looking statements" can be identified by use of words such as
--------------------------
"expect," "estimate," "project," "forecast," "anticipate," "plan" and similar
expressions.
<PAGE>
EXHIBIT 99.2
AMENDENT NO. 1
TO THE
FIRST DATA CORPORATION
SUPPLEMENTAL SAVINGS PLAN
WHEREAS, First Data Corporation (the "Company") has established the
First Data Corporation Supplemental Savings Plan (the "Plan") to provide
benefits for those of its employees who where eligible to participate; and
WHEREAS, the Company desires to amend the Plan to change the maximum
percentage of compensation participants can elect to defer under the Plan from
12% (twelve percent) to 9% (nine percent); and
WHEREAS, Section 10 of the Plan authorizes the Board of Directors of
the Company (the "Board") to amend the Plan; and
WHEREAS, the Board has authorized the Compensation and the Benefits
Committee of the Board ("Compensation Committee") to act in its place with
respect to the Plan; and
WHEREAS, the Compensation Committee has authorized the Employee
Benefits Administration and Investment Committee to adopt certain Plan
amendments;
NOW, THEREFORE, the Plan is hereby amended, effective as of January 1,
1998 as follows:
1. Section 3 (c) of the Plan is hereby amended to read as follows:
"(c) Any employee who is eligible to participate in the Plan in
accordance with Section 3(a) above and who is not excluded from participation in
accordance with Section 3(b) above shall become a Participant in the Plan by
transmitting a Participation Election to the Committee or its delegatee in
accordance with terms of the Plan and such rules as may be established by the
Committee. The Participation Election for each Participant shall specify the
amount, stated as a percentage, not in excess of 9%, to be uniformly applied to
all of the Participant's Eligible Compensation in determining the amount of such
Participant's Eligible Compensation to be deferred for the subsequent Plan Year.
A Participation Election made by an employee eligible to participate in the Plan
shall become effective as of the first Entry Date following receipt of the
Participation Election by the Committee or its delegatee. A Participation
Election shall be irrevocable once it become effective except as provided below.
A Participant's election to defer Eligible Compensation shall remain in effect
from one Plan Year to the next, unless changed by the Participant by means of
transmitting a written or electronic notice revoking the Participation Election
or a new Participation Election with the Committee or its
<PAGE>
delegatee in accordance with such rules and procedures as may be established by
the Committee. A revocation of a Participation Election shall be effective as
soon as practicable following its receipt by the Committee or its delegatee. A
new Participation Election Shall become effective as of the first day of the
Plan Year following receipt of the new Participation Election by the Committee
or its delegatee."
2. In all other respects, the Plan is hereby ratified and confirmed.
IN WITNESS WHEREOF, this Amendment has been executed this ______ day of
September, 1997.
FIRST DATA CORPORATION
EMPLOYEE BENEFITS ADMINISTRATION
AND INVESTMENT COMMITTEE
By: ____________________________
<PAGE>
EXHIBIT 99.3
AMENDMENT NO. 2
TO THE
FIRST DATA CORPORATION
SUPPLEMENTAL SAVINGS PLAN
WHEREAS, First Data Corporation (the "Company") has established the
First Data Corporation Supplemental Savings Plan (the "Plan") to provide
benefits for those of its employees who were eligible to participate; and
WHEREAS, the Company desires to amend the Plan to change the interest
rate used in determining the Interest Equivalent in Section 7(b) to 7 1/2% from
8%, effective as of January 1, 1999; and
WHEREAS, Section 10 of the Plan authorizes the Board of Directors of
the Company (the "Board") to amend the Plan; and
WHEREAS, the Board has authorized the Compensation and Benefits
Committee of the Board (the "Compensation Committee") to act in its place with
respect to the Plan; and
WHEREAS, the Compensation Committee has authorized the Employee
Benefits Administration and Investment Committee to adopt certain Plan
amendments.
NOW, THEREFORE, the Plan is hereby amended, effective as of January 1,
1999, as follows:
1. Section 7(b) of the Plan is hereby amended by adding the
following new sentence to be inserted after the second sentence thereof:
"Effective as of January 1, 1999, "7 1/2%" shall be substituted
for "8%" in the foregoing sentence."
2. In all other respects, the Plan is hereby ratified and confirmed.
IN WITNESS WHEREOF, this Amendment has been executed this 24th
day of September, 1998.
FIRST DATA CORPORATION
EMPLOYEE BENEFITS ADMINISTRATION
By:_____________________________
